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Nepal becomes US-China arm-wrestling table

Himalayan nation the latest to become entangled in the trade war between the superpowers
Nepal becomes US-China arm-wrestling table

A devotee throws powder toward a ceremonial bamboo pole to mark the beginning of Holi, the spring festival of colors, at Basantapur Durbar Square in Kathmandu on March 10. (Photo: AFP)

Published: March 14, 2022 10:42 AM GMT
Updated: March 14, 2022 10:42 AM GMT

The US-China rivalry over the Indo-Pacific region has spilled over to South Asia and the Himalayan nation of Nepal is the latest to become entangled in the trade war between the superpowers.

The democratic nation, which was a Hindu kingdom until 2008, witnessed considerable political upheavals and street protests until last month over a US$500 million grant from the US to build power and road infrastructure projects.

Nepal's parliament on Feb. 28 ratified the grant, the biggest American financial pledge to Nepal so far, after five years of dilly-dallying over criticism that the deal undermined the Himalayan nation’s sovereignty.

The parliamentary ratification came with a 12-point explanatory note that among others things stated that the aid has no military component and has nothing to do with the Indo-Pacific strategy of the US administration. Under the new norms, Nepal would be free to pull out if the US violated this understanding.

The US had threatened that failure to ratify the deal by Feb. 28 could lead to termination of the grant and a possible review of US-Nepal ties. It also alleged that the failure would be seen as a result of Chinese influence over Nepal’s politics.

The deal had caused apprehension in certain sections of the population who took to the streets, triggering many arrests and a curfew in some parts.

The nations are engaged in economic, diplomatic and military tactics to gain access to the Indo-Pacific, which is the most populous region in the world

On Feb. 16, Nepal police used tear gas and water cannons to disperse some 3,000 people who were protesting the package doled out by an independent US aid agency, Millennium Challenge Corporation (MCC).

According to protesters, the funding is part of the US administration’s Indo-Pacific strategy to contain a rising China. The US has dominated the Pacific Ocean, which is also called an “American lake,” since the end of World War II. But the spoiling presence of China, an aspirational superpower, in the region is posing strategic competition to the US.

The nations are engaged in economic, diplomatic and military tactics to gain access to the Indo-Pacific, which is the most populous region in the world and has more than one third of the global economy under its command.

The Indo-Pacific region acts as a strategic link between the Atlantic and the Pacific oceans and accounts for the transport of the highest tonnage of goods, of which more than 75 percent is of extra-regional origin.

The MCC funds, which Nepal managed to secure through a 2017 pact with the US, are aimed at building Nepal’s infrastructure like national highways and electric transmission lines.

The US claims the aid package comes without any strings attached. But part of the plan is to sell surplus power to India, a member of QUAD along with the US, Japan and Australia. The four-nation security grouping is aimed at curbing Chinese influence in the Indo-Pacific region.

Since it was set up in 2004 through an act of the US Congress, MCC has pumped in $15 billion to 29 developing countries. Though Nepal inked the pact five years ago, there is strong opposition, particularly from communist factions, in the country against availing the aid package.

Communists and those opposing it claim the aid will endanger Nepal’s national interests. They cite the compact’s Article 7.1, which states, “The parties understand that this compact, upon entry into force, will prevail over the domestic laws of Nepal,” to drive the point home.

Of late, Nepal has started increasingly banking on China as an alternative to domination by India, with which Nepal shares a 1,850-kilometer open border

The MCC aid packages are aimed at economically empowering poor nations and minimizing global hostility toward the US administration and its policies.

The US has repeatedly said its Nepal project has no military implications and predates its Indo-Pacific strategy.

The US, which has been the largest bilateral donor to Kathmandu for decades, alleges that China is behind the disinformation campaign against the multi-million-dollar aid package. 

On Feb. 10, US assistant secretary of state Donald Lu raised the issue during separate phone conversations with Prime Minister Sher Bahadur Deuba and main opposition leader K.P. Sharma Oli.

Lu warned that “it would consider China’s interest behind Nepal’s failure to ratify the compact.”

Of late, Nepal has started increasingly banking on China as an alternative to domination by India, with which Nepal shares a 1,850-kilometer open border.

Chinese economic interests in Nepal are not limited to tourism as they used to be. Chinese goods like mobile phones, an array of electrical and electronic items, and clothing and fruits are found everywhere at prices competitive with Indian goods.

China is the largest foreign direct investor in Nepal with investment of 22.5 billion Nepali rupees ($188 million) in the 2020-21 fiscal year, according to data released by Nepal's Department of Investment.

The largest Chinese investments are in the tourism sector, which stood at $125 million, followed by other services and the information technology sector

This is the sixth year in a row that China has edged past others in terms of foreign direct investment in China.

"Over the last few years, China has emerged as a very important investor in Nepal," Jiblal Bhusal, the department's director-general, told Xinhua, the official Chinese news agency.

The largest Chinese investments are in the tourism sector, which stood at $125 million, followed by other services and the information technology sector.

China’s Belt and Road Initiative (BRI), to which Nepal is a signatory, has also emerged as a major source of China's investments in Nepal. The BRI, started by Beijing in 2013, is a massive infrastructure project that would stretch from Asia to Europe.

Since 2016, China has been on an investment spree in Nepal. In 2018, the two initiated talks on a number of railroads and transmission line projects.

China has started a rail track project to connect Lhasa, the capital of the Tibet Autonomous Region, to the Nepali capital Kathmandu. Proposed in 2008, the train line, costing over $300 million, is expected to be ready by 2025.

China has already offered landlocked Nepal, which previously had to rely heavily on India, four ports for shipment of goods and Nepalese schools have started to teach Mandarin.

Like it or not, Nepal has already become a party to the US-China rivalry in the Indo-Pacific, widely described as the energy highway of the world.

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